Abstract: This paper provides new theory and evidence on the effect of international trade on wage inequality within and between firms. Using German micro-data, I show that relative wages and relative employment for skilled workers are higher at larger firms, suggesting that decisions regarding scale, relative demand, and relative wages for skill are interconnected within firms. To account for these interconnections, I develop a model in which firms operate a non-homothetic production technology and face an upward-sloping supply function for labor. In firms that expand after trade liberalization, the increase in size raises the relative productivity of more skilled workers, thereby increasing both relative wages and employment as the firm moves up their supply function for labor. I structurally estimate the model using a new method that separately identifies the elasticities of labor demand and supply. Quantitatively, I find sizeable effects of trade on aggregate inequality in Germany, and that within-firm effects account for 30 percent of the distributional effects of trade. A tax reform that corrects misallocations due to labor market frictions raises the gains from trade for all workers by improving worker-to-firm sorting and redistributing income from firm profits to wages.
Abstract: This paper studies how trade in services affects the innovation activities of firms through easing access to foreign ideas and technology. We assemble a new dataset containing detailed information regarding the trade in services, innovation and export activities of German firms and provide causal evidence that access to foreign innovation services increases firms' innovation activities, controlling and instrumenting for standard market size and competition effects of trade. Highly innovative firms are simultaneously firms with high import intensity of foreign innovation services and greater access to foreign markets via exports. Building on this observation, we argue that firm-level complementarities in selection into becoming an innovator, importing foreign innovation services, and exporting magnify the effect of changes in innovation service trade cost at the firm-level. We build a quantifiable model that is consistent with our reduced form findings and highlights the importance of complementarities in selection at the firm-level for the aggregate effects of trade on innovation.
Abstract: This paper draws a causal link between increased levels of global value chain participation (GVCP) and increases in a country’s current account. We document empirically that stronger GVCP is associated with larger current account balances. According to our estimates, cross-country differences in GVCP reduce the hitherto unexplained part of current account imbalances substantially for some countries. For example, for the United States and Japan the unexplained part of the current account falls by 75% and 50% over the sample period when controlling for their GVCP relative to the rest of the world; for Germany, the unexplained part of the current account deficit falls by an average of 10%.